With Labor Day behind us we are now officially heading into the most turbulent period of the year. With 2020 being an election year that would apply politically as well as when it comes to participating in the financial markets. At least in the latter department – not a moment too soon. The big summer lull is by far my least favorite season and I’m looking forward to a bit more action and volatility – both realized and implied.
Well that didn’t take very long now, did it? Just two days ago I was bemused by a market seemingly running on cruise control and pushing up vertically during what is historically considered a bearish week. Of course the ensuing correction yesterday looks rather obvious in hindsight to the uninitiated, but let me assure you that I have seen raging rallies like these extend far beyond anyone’s imagination on numerous occasion in my time. In other words, if you somehow managed to pin the top then strike it up to good luck and keep your ego in check.
Equities continue to power higher with no apparent end in sight whilst ignoring all seasonal bias. This does not come as a huge surprise as we are in the midst of a powerful low volatility bull cycle that is partially fueled by the systematic inflation of the U.S. Dollar – long term consequences be damned. Cash may have used to be king but not now it’s everyone’s least favorite step child.
Along with April and May the months of September and October are actually my most favorite of the entire year. The heat finally breaks, the nights are getting cooler, and most importantly the tourist zombie armies have finally returned to their respective icy enclaves in the North. Prices across the board are dropping as well, so it’s a perfect time to plan a late summer or early fall vacation. Life is good – until November when I get to complain about too much rain and cold feet again.
This is going to be a brief post as we are running low on technical context that would provide any meaningful edge to our respective trading activities. The market has been going up – it continues to go up – and it’ll go up until that famous last sucker finally has been found. Based on historical statistics (see my Monday post) and the ongoing trend we knew this week would most likely end in the plus but few of us expected the ferocity of buying pressure we’ve witnessed all week.
As equities remain on cruise control and there’s really not much new to report on the daily front I decided to take a peek at some of my longer term momentum charts. The ones that stood out all relate to market breadth, which refers to the ratio between advancing stocks vs. declining stocks. But why would we care about that?
British tourists have been departing Spain in droves during the past weekend in an attempt to avoid newly introduced legislation that imposes a 14-day quarantine on any travelers returning from the Spanish Peninsula. Suffice it to say that this effectively puts the death knell on an already dismal 2020 holiday season, and given ongoing political shenanigans the prospects for the fall and winter seasons are extremely dim. I foresee at least 50% of all tourism related businesses to go bust before the end of this year.
In my Wednesday post I introduced the Z-Score and also explained how we use it for scoring implied volatility, making it the IVZ-Score. What I didn’t focus on much is why one would do such a thing in the first place, and the underlying purpose may not be immediately apparent to some. Now I already can sense your eyes glazing over plus it’s Friday, so I’ll promise to make this brief and actionable for non-nonsense traders mainly interesting in turning a buck.
The implied volatility Z-score is a way of framing implied volatility in context. For example, today SPY closed up 0.35%, which is decent but nothing compared with some of the candles over the past few months. But how normal or abnormal is it? We don’t know unless we’re able to put it in context.
I was born with a fairly pale complexion which has always forced me to stay out of the sun lest I end up looking like a roasted chicken after only minutes of being exposed to a UV index anywhere above 5. It’s not that I hate the sun – rather the sun seems to hate me, or at least it hates my skin as it insists on burning it. As a financial blogger who also trades for a living it’s easy to understand that summer is my least favorite season of the year.